OREANDA-NEWS. Fitch Ratings has affirmed Compania Cervecerias Unidas' (CCU) Long-term national scale rating at 'AA+ (cl)' with a Outlook Stable. Fitch has simultaneously affirmed and withdrawn CCU's foreign and local currency Issuer Default Ratings (IDRs) due to commercial reasons. A full list of CCU's ratings can be found at the end of this release.

KEY RATING DRIVERS

The affirmation reflects the company's solid operating profile and credit metrics supported by its strong business position and the defensive nature of the beverage industry. These factors have contributed to its strong cash flow generating capacity and have resulted in a conservative capital structure and sound liquidity profile. The ratings also incorporate the possibility of M&A activity funded with up to USD700 million in cash that the company raised through a capital increase in 2013.

CCU's ratings are constrained by its operations in Argentina, given the high political and economic risk associated with operating in this country. Nearly 10% of the company's EBITDA is generated by its Rio de la Plata operations.

Operational Performance Affected by Devaluation

CCU generated CLP223 billion of consolidated EBITDA in 2014, a 13% decline from CLP255 billion reported in 2013 despite increased volumes of 4.5% to 22.8 million hectoliters. The Chilean operations, which remain the backbone for the company's credit rating, generated CLP168 billion in EBITDA down from CLP185 billion during 2013. The main driver for the decrease was the devaluation of the Chilean peso against the dollar followed by increased marketing and distribution expenses. Volume in Chile grew 4.1% on average reaching 16.2 million of hectoliters. The average price increased 4% in order to transfer the increase in specific taxes on alcoholic beverages that went into effect Oct. 1, 2014.
CCU's Rio de la Plata operations also reported lower EBITDA of CLP20 billion as a result of Argentina's anemic economic environment, costs pressures arising from inflation, the devaluation of the Argentinean peso, and price restrictions. Average volumes of the Rio de la Plata division increased 6% to 5.3 million of hectoliters due to CCU's entrance into Paraguay; on an organic basis, average volumes decreased 3%. The average price decreased about 6% mainly due to a shift in product mix. CCU is not able to repatriate dividends from Argentina.

Strong Market Position; Diversified Portfolio

CCU's strong position allows it to lead market price adjustments in order to cope with cost pressures. CCU has been able to maintain a 41% market share in the Chilean market over the last several years despite competitive pressures. Its Rio de la Plata market share, which includes Argentina, Paraguay, and Uruguay, is about 17%.

The company's Chilean market position is supported by the broad appeal of its flagship brand, Cristal, a diversified product portfolio, an extensive direct-distribution system, and successful marketing strategies. CCU also maintains leading market shares in the mineral water and soft drink segments. It is the largest bottler and distributor of mineral water in Chile with a market share of 58% and the second bottler of soft drinks with a 27% market share.

Conservative Financial Strategy; Strong Liquidity

Management continues to maintain a conservative capital structure and high liquidity. CCU's gross leverage ratio as of Dec. 31 2014 was 0.9x, while its net leverage ratio was negative 0.1x. These ratios compare favorably with 1.1x and 0.2x average debt-to-EBITDA and net-debt-to EBITDA, respectively, from 2010-2013. CCU's total debt declined to CLP199 billion as of Dec. 31, 2014 from CLP263 billion in 2013; in March 2014 CCU prepaid CLP 75 billion bonds series I local currency denominated issued against bond line No 572. CCU's total debt is divided between CLP134 billion long-term debt and CLP65 billion short-term.
CCU's liquidity is strong as its CLP214 billion of cash fully covered its short-term debt of CLP65 billion. Part of the cash balance comes from the proceeds of a CLP340 billion (USD700 million) capital contribution completed in November 2013 to finance future growth. CCU's debt balance should remain relatively unchanged; operating cash flow and cash from the equity increase will be used for capex and M&A activity. Fitch anticipates that cash will be used for growth opportunities, such as the joint venture in Colombia with Postobon.

RATING SENSITIVITIES

The most likely cause of a downgrade would be a change in management's attitude toward maintaining a strong capital structure or a large debt-financed acquisition. A positive rating action is not likely to occur given that Fitch does not expect a significant improvement in operational performance and credit metrics.

KEY ASSUMPTIONS

--Modest volume growth in Chile.
--Limited Improvement of EBITDA margin of Chile division due to low raw material and energy costs.
--Strong capex in 2015 and 2016 due to the construction of the new non-alcoholic plant in Chile.
--USD100 million capital increase in Colombia during 2015 and 2016 to build a new plant.
--50% dividend policy.

Fitch has affirmed the following ratings:

Compania Cervecerias Unidas
--National scale rating of bonds No. 388, 572, 573, 716, 717 and 718 at 'AA+(cl)';
--Long-term national scale rating at 'AA+ (cl)';
--National equity rating at 'Primera Clase Nivel 1'.

Fitch has affirmed and withdrawn the following ratings:
--Foreign and local currency Issuer Default Ratings (IDRs) at 'A'.
The Rating Outlook Is Stable.